Fox Still Wrong About Income From Capital Gains: It's Still Income

Fox News, still fighting hard to protect the wealthy, continued today to attack President Obama's plan for deficit reduction on the grounds that once a person has paid income taxes, they should never be required to pay any more taxes on that money, ever again. Fox figures continued to pretend that income made from capital gains is somehow not income, unlike the money middle-class Americans earn from working at their jobs. This is not true. They are, in fact, both income.

Fox's recent defend-the-rich push was sparked by Obama's announcement of a deficit reduction plan of $3 trillion that would call for $1.5 trillion in tax increases, mostly on the wealthy. The plan was said to be guided by the so-called “Buffett Rule,” named for billionaire investor Warren Buffett, who argued in a recent New York Timesop-ed that he should not pay taxes at a lower rate than his employees -- as he currently does.

Fox's spin on capital gains income began yesterday on Fox & Friends, with a bungled and confusing exchange between co-hosts Steve Doocy and Brian Kilmeade. Doocy complained, on Buffett's behalf, that not only has Buffett “already paid 35 percent” on the money he's put into the stock market, but he must also pay capital gains tax on money he makes from buying and selling stocks.

From the broadcast:

DOOCY: He does the same thing [that] everybody who invests in the stock market does. When you invest in the stock market, you're taking the money that you have made --

KILMEADE: Made.

DOOCY: -- and if you're taxed at the higher rate, you've already paid 35 percent on it. Warren Buffet has already paid 35 percent on all the money he has put in the stock market. And then -- and this is one of those things that the government decided, OK, to get people to invest in the stock market, let's make sure that when they sell, rather than sell at 35 percent tax rate, it would be 15 percent. So anyway, while they talk -- so, it's a double tax. Do you want to be paying --

KILMEADE: Forty-five percent.

DOOCY: -- 35 and then 35 again? If you're an investor, you would say that's double taxation.

Watch:

A similar “double taxation” attack continued on today's broadcast of Fox & Friends, during a panel discussion with television host and former Cincinnati mayor Jerry Springer; Larry O'Connor, blogger for Andrew Breitbart's Big blogs; and, bizarrely, country singer Billy Dean:

SPRINGER: What I am saying is, if the top 2 percent -- he's talking about people that make over a million dollars a year, why is all of a sudden -- this is the great cause that you're all --

O'CONNOR: Because it's a lie.

DEAN: A million dollars isn't that much money anymore.

SPRINGER: I should pay more -- and so should people --

[CROSSTALK]

O'CONNOR: They're talking about Warren Buffett versus his secretary.

SPRINGER: Pay for it.

O'CONNOR: You cannot value somebody's love for the country based on what they pay. Are you saying that those people who don't pay federal income taxes --

SPRINGER: What are you going to pay?

O'CONNOR: Warren Buffet -- they're talking about capital gains tax. And you know this, Jerry. You're a very smart guy. He's already paid income tax on his income, and now he takes that money --

DEAN: This is true. That's double taxation.

O'CONNOR: -- after he has paid taxes and made investments, and then he has to pay capital gains taxes. They're comparing that extra, double taxation to his secretary. And if Warren Buffett cares about his secretary, why doesn't he give her a raise?

CARLSON: Good point.

O'CONNOR: Why should I pay for his secretary?

Watch:

This is all wrong. For several reasons.

Income tax in the United States is progressive, meaning that tax rates increase along with the amount of money a person earns. Currently, the highest income tax bracket is indeed 35 percent, but it applies only to any income earned above $379,150. Income below that threshold is taxed at a lower rate; for example, the first $17,000 of income is taxed at 10 percent. So anyone claiming that a wealthy person paid “35 percent” of his income in taxes is not quite right: that tax only applies to income made over $379,150.

But Warren Buffett certainly earns well over that amount of money, which brings us to the next problem with Fox's attack. While the Fox figures claim that Buffett has “already paid 35 percent” tax on the income he's earned, Buffett's entire point, in his New York Timesop-ed, is that he does not make most of his income from drawing a salary. Rather, he now makes most of his income from capital gains and dividends through his investments -- which, as Fox acknowledges, are taxed at a lower rate of 15 percent. Buffett wrote:

While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks. Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as “carried interest,” thereby getting a bargain 15 percent tax rate. Others own stock index futures for 10 minutes and have 60 percent of their gain taxed at 15 percent, as if they'd been long-term investors.

[...]

Last year my federal tax bill -- the income tax I paid, as well as payroll taxes paid by me and on my behalf -- was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income -- and that's actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.

If you make money with money, as some of my super-rich friends do, your percentage may be a bit lower than mine. But if you earn money from a job, your percentage will surely exceed mine -- most likely by a lot.

Indeed, many very wealthy people make the majority of their money through investments. A February 2010 report by the Center on Budget and Policy Priorities (CBPP) found that the top 400 taxpayers in 2007 “derived two-thirds of their income from capital gains and qualified dividends.” The result? In 2007, those top 400 filers paid an average tax rate of 16.6 percent.

How does that compare to what middle-class families are paying? A recent post on CBPP's blog included this chart, showing the effective tax rates on earners making $50,000 to $75,000 with less than 10 percent coming from investments, and the effective tax rate on millionaires who earn more than two-thirds of their money from investments:

This is the crux of Buffett's argument: the mega-rich, especially those earning money through investments, are paying lower taxes than the middle class.

Finally, Fox's “double taxation” argument doesn't make sense. Any income that a person draws from a paycheck is taxed as income from labor -- at a progressive rate up through the highest bracket of 35 percent. Any income that a person earns from capital gains and dividends is taxed at 15 percent. This is not double taxation -- it's a tax on new income.

Let's say, for example, that Warren Buffett earned $100 through labor. Ignoring, for now, payroll, state, and local taxes, he would have to pay a 10 percent tax on his earnings, since the lowest income tax bracket is 10 percent. That leaves him with $90. Let's say he invested the $90 in stocks and his investment more than doubled within a month -- let's say it increased to $190. When he sells the stock, he must pay $15, or 15 percent of the income -- $100 -- that he earned from this investment.

Both the first $100 and the second $100 he earned in this scenario are income, even though Fox is suggesting in these segments -- as Gretchen Carlson and Bill O'Reilly did earlier this week -- that they are somehow different. The IRS calls capital gains a form of income; so does the Congressional Budget Office, which noted in a policy brief (emphasis added):

A capital gain is an increase in the value of an asset; a decrease in an asset's value is a capital loss.

[...]

When a gain accrues, it is a form of income for the holder of the asset.

The Supreme Court has also ruled that capital gains are income; in the 1926 decision n Bowers v. Kerbaugh-Empire Co., the court found that:

[I]ncome may be defined as gain derived from capital, from labor, or from both combined, including profit gained through sale or conversion of capital.

No matter how much Fox & Friends tries to pretend otherwise, income from capital gains is, in fact, income. The only difference between it and income earned from working is that capital gains income is taxed at a lower rate. And the result of a tax policy that favors those who make money through investments is this chart, which shows how much income has increased since 1979 for different income groups: